The latest Per Capita paper summarises the research on various cognitive biases (loss aversion, endowment effect, etc) and makes suggestions for policymakers about ‘choice architecture’ that helps people make better, less irrational, decisions. For example, default options of sensible choices where people have to opt out to avoid them preserves freedom to choose while encouraging decisions that will benefit most people.

It’s the kind of argument Cass Sunstein has been making for years, and on which he co-wrote with Richard Thaler a widely-cited 2008 book called Nudge: Improving Decisions About Health, Wealth and Happiness (which is strangely not cited in Jack Fuller’s Per Capita paper; if Sunstein did not coin ‘choice architecture’ he’s certainly its main populariser).

I don’t doubt that these cognitive biases exist, or that their negative effects can be reduced by ‘choice architecture’. But I do want to take issue with another example of the annoying rhetorical strategy of setting up straw man opponents:

Our institutions … are calibrated in the belief that we fully calculate the costs and benefits of every decision. … policymakers have had to ignore evidence that people make the same mistakes over and over again. They have assumed not only that everyone is perfectly rational, but that we have perfect self-control, and perfect self-interest. This is a common view of human nature. It is not entirely wrong. But it is narrow, out of touch with the latest science, and – applied to policy – it is damaging.

Fuller needs to get out of the neuroscience lab more often. The assumption that people are insufficiently rational to make good decisions, plans for the future and take prudent risks is at the core of modern government – why a vast array of potentially harmful actions are banned, why the welfare state compulsorily insures us against a huge number of life’s misfortunes, and why we are continuously lectured by state authorities to give up smoking, lose weight, practice safe sex etc etc.

Fuller’s ‘choice architecture’ could be turned around to partly de-nanny the nanny state. It is an alternative not to citizen irrationality but to default options of government services. For example, in schools we could assume that in a well-informed market (with government mandating or otherwise assisting in providing information, as is now happening) we can assume that most people are rational enough to make choices which are as good as or better than public education.

Well-designed ‘choice architecture’ is as much an alternative to under- as over-assuming citizen irrationality.

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Unfortunately we are not all born equal. Some have more intelligence than others. Some embrace irrational and dysfunctional cultural values that undermine their prosperity, such as educating girls less than boys.

Some choose not to send their children to school, which sets them up for a life of social disadvantage, unemployment and welfare dependency.

The state should assume even less about the rationality of citizens and plan accordingly – more early intervention to help neglected children etc.

I’m socially libertarian but economically libertarianism does not accommodate individual differences or acknowledge that some people have less basic capacity to make rational decisions.

This is not their fault but the state will not acknowledge this political correct taboo and plan accordingly. Ironically, this is another example of irrational cultural values undermining the utilitarian goals of the state.

Ed Glaeser, Professor of Economics at Harvard University, said it best:

Behavioral economics has occasionally been seen as an excuse for paternalistic government intervention. After all, if humans don’t maximize their welfare, then shouldn’t the government maximize for them? …
It is true that if consumers reason poorly and don’t maximize their welfare, then the basis of traditional welfare economics is in shambles. While the incentive principle and the no arbitrage equilibrium are likely to survive the integration of psychology, formal welfare economics certainly requires a major overhaul. But I have my doubts that this overhaul will ultimately cause us to be more enthusiastic about governmental intervention in the economy. It seems more likely that a proper appreciation of the limits of mankind will cause us to be increasingly scared of government intervention and increasingly ardent in our support for limits on government.

The real case for laissez-faire is not that the individual is perfect, but that the state will do worse than the private individual, and the strength of this case has always relied more on the fallibility of the state than on the perfection of markets…
Human beings surely make mistakes about their own welfare, but the welfare losses created by these errors are surely second order relative to the welfare losses created by governments which not only make errors, but also pursue objectives far from welfare maximization. Individuals may procrastinate and foolishly invest, but they tend not to voluntarily enroll in concentration camps.

Fuller’s ‘choice architecture’ could be turned around to partly de-nanny the nanny state.

Yes, one area is compulsory superannuation. Interestingly, Fuller’s paper cites Obama’s proposal to enrol workers in personal savings schemes with an opt-out option. If applied here, that could mean that people could opt out of employer super contributions – great news for people on low-incomes or with discontinuous work histories who would be largely reliant on the pension anyway.

One question we should ask of a society is: is it able to support people becoming better versions of themselves? If self-control is lacking, can it encourage self-control? Does it cultivate the moral resources people require to pursue their own welfare?

Australia, like most societies reeling from Hayekism, has progressively lost this capacity, meaning that more and more social problems end up in the hands of the state. The alternative is not to tell people who are addicted to junk food, mired in debt or domestic violence to look after their own welfare. It is to engage seriously with how Australia can mature as a nation.

This requires identifying the sources of good influence in our society (Per Capita’s next report). Governments have a role in setting the conditions for this evolution by designing the contexts in which we make choices. Individuals and organisations have a role in creating a civic culture and establishing sources of good influence. (Critically, it is now emerging that radical inequality is the biggest barrier to developing a civic culture).

If Hayek had paid a little more attention to his lectures on Aristotle we may have avoided this predicament.

Jack – There is a conservative/classical liberal argument that sees the same social phenomena but offers a very different take. This is that the welfare state has removed many of the disincentives to imprudent behaviour by always paying to help clean up the mess of poor health, broken families, etc etc. Unsurprisingly, this imprudent behaviour has increased. Similarly, left-liberalism has criticised ‘judgmental’ approaches to bad behaviour, whereas classical liberalism – while supporting tolerance of behaviours that don’t cause harms to others – sees a useful role in maintaining social norms that promote positive outcomes.
Ultimately, people do have to look after their own welfare – nanny can’t watch them 24/7.

Andrew – thanks for your reply. I’m glad you recognise some of the same problems, but I don’t think the conservative/classical liberal argument you outline seriously engages with them. Do you really think families are made or broken by incentives? Do you think parents fight and divorce because they can relax in the knowledge that the state will look after their estranged kids? The problem has deeper roots, in the quality of our communities. Or, do you really think people overconsume junk food because they know the state will pitch in for their heart attack health bill? People eat junk food because its available, cheap and addictive (cf. recent research by David Kessler).
The important question is how we rebuild communities, and create environments which bring out the strengths of human nature rather than play on our weaknesses. Government is an important player in this task. The prerequisites for this revival are a reduction in inequality and an engagement with how good social norms actually form. Ultimately, we need less Thatcherite rhetoric and more careful attention to the quality of the institutions and spaces in which people spend most of their time, and develop habits and preferences.

Do you really think families are made or broken by incentives? Do you think parents fight and divorce because they can relax in the knowledge that the state will look after their estranged kids?

Maybe married couples don’t divorce to get a few bucks, but I think welfare could certainly encourage women in weakly-committed couples to take less care with contraception or reject abortion and it may also enable men in those sorts of relationship to leave and avoid their financial responsibilities.

Or, do you really think people overconsume junk food because they know the state will pitch in for their heart attack health bill?

Who cares if people choose to eat junk food and get fat, so long as they don’t impose a cost on others. There are plenty of fat people around who never eat junk food and plenty of thin people who do.

The important question is how we rebuild communities

I agree, but when has government ever managed to succeed in doing this? Forced reduction in inequality simply breeds resentment from the taxed and a culture of entitlement amongst the recipients.

The welfare state makes it easier to walk away rather than try to repair damaged relationships, makes it easier to keep a kid rather than have an abortion, put it up for adoption, or get married (or be more careful with the contraception in the first place). It’s certainly not the only factor, it is in a feedback loop with major cultural changes – which have big benefits but also a downside.

I’m with Rajat – government does not create communities, and nor does forced equality. I can assure you I feel no bond with the pensioners my taxes support, nor they with me.

I’ve read some of the recent work on inequality eg this. But again this is correlation dressed up as causality.

There is a lack of inequality in our society because the difference between the least and most intelligent is growing. Those that have the capacity to improve their status do so while those with no capacity stagnate.

“100+ year ago you either worked for a living or starved to death”
Well, it wasn’t that bad. Apart from charitable and government institutions, families looked after their own, especially the elderly or slightly disabled.
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“What’s still missing is an honest acknowledgement of why the underclass is growing”
One reason could be the change in work. I can remember getting on the bus and a conductor (sometimes it was my grandfather) would collect the fare. My grandmother was a seamstress who ran a thriving little business from home, making dresses for the wealthy neighbors. They never retired because they enjoyed working/making things, interacting with people and earning that money (which they gave to us).
There used to be a lot of work that wasn’t exactly ‘symbolic’ and it may be that we need a certain amount of that kind of work because it’s the only kind that some people are suited for.
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“government does not create communities”
It can assist by providing the places and opportunities for people to meet. My local government has a recreation centre – library, gym, tennis courts etc – and people meet at the activities there. It arranges a volunteer service to connect residents to help new arrivals to Australia practice English etc. In the old days a child health nurse would visit new mothers and connect up the ones living near each other to form playgroups etc.

Russell – I think the net effect of government has been to reduce community ties, because by doing so many things it removes the need for people to join together. This is not entirely a bad thing: community is over-rated and can be oppressive as well as fulfilling. Market society has similar effects in allowing us to meet many needs via contractual instead of community ties.

Wasn’t it Aristotle that said a fair/just outcome required that we treat equals equally, and unequals unequally? Are we unable to deal with ideas of this complexity in our social policy or are we unwilling?

100+ years ago all you needed to survive was the ability to do physical labour, and people survived without literacy or numeracy.

Now to function well and thrive in society you need the cognitive ability to use an ATM, fill out complex government forms, buy healthy food not junk food, choose responsible behaviour eg not drinking and driving etc.

The point is that the minimum intellectual requirements to prosper have increased significantly, and have increased far ahead of the general IQ increases in society due to better nutrition, education etc.

Thus you have a growing underclass without the cognitive ability to function effectively in society.

But our governments will never acknowledge that we are not born equal.